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Shadow banking conjures up images of money laundering and black market crime. In China, shadow banking is described a little differently.

"It's a way for local governments to get funding or financing. These municipalities set up a company and invest in it. They're essentially off balance sheet vehicles of the banking system," said Andrew Milligan, head of global strategy at Standard Life Investments in Edinburgh.

Shadow banking is also peer to peer lending, companies lending to each other, unregulated by the China Banking Regulatory Commission (CBRC).

Is it worrisome that this off-the-radar segment of China finances is estimated by CBRC to be growing at a clip of 25% year over year? Normal lending growth is expanding by 14%. Official lending is much larger in aggregate, but growing at a slower rate.

The Central Bank of China is paying closer attention to this. What does the market think?

"Is it a problem? Yes and no is the answer," said Milligan. "And that is because we want sustainable companies in China that we can sell to. The downside is that their financing in some cases is an unknown. A lot of the money invested is going into large holes in the ground. That's money wasted. There is some evidence that the usual pattern of these loans is they find their way to the central government and the debts get rolled over by the local municipal banking system. I don't think it is worrisome yet because China is perfectly able to manage the situation," he said, adding "at the moment."

Credit flows beyond traditional bank loans have quadrupled in size since 2008 to about 20 trillion yuan ($3.2 trillion), roughly 40% of China's GDP. Banking analysts and rating agencies have warned that China's shadow system poses a risk because it is believed, as Milligan pointed out, that a lot of these investments are money losers.

In February, Financial Timesreported that "China will rein in its shadow banking system by requiring banks to provide greater disclosure about their off-balance sheet activities." As the Central Bank mines for data on these investment vehicles, and requires the shadow lenders to provide it with data, the new regulations could lead to a slowdown in that system, and maybe even to local economies in third and fourth tier cities far from the minds of Beijing.

Last week, the CBRC introduced 12 rules for regulating shadow finance -- from project development to pension funds -- in an effort to bring them in line with the country's commercial and retail banking system.

For example, the rules stated that banks must link wealth-management products with the actual assets that proceeds are invested in. For already-issued products with assets that don't meet the new standards, banks should take provisions for losses by the end of this year, the regulatory commission said. Banks are banned from investing more than 35% of the total proceeds from the sale of wealth-management products in loans.

“This is so far the harshest and most concrete tightening measures regarding wealth-management products,” Societe Generale's Wei Yao said in a note to clients. “The purpose of this set of policy from the CBRC is not to devastate banks, but to cap future risk,” International Business Times reported him saying from Shanghai.

China's off balance sheet debts could, in theory, implode. Pension funds could have been set up to invest in non-returning assets. Companies could be throwing money into a black hole in peer to peer lending.

But overall, China's official, and much larger, banking system is relatively sound. Non-performing loans account for less than 1% of the total lending portfolio. In Brazil, it is more like 4.5%.

China's government banks play by different rules. Short term debt is constantly rolled over when deemed unpayable.

"We should use the word 'shadow' with a bit of caution," said Milligan. "This is actually a service of a bunch of concentric circles that are mostly known to the government. There is a lot of data in China. This is not an underground system trying to be hidden from view. The Central Bank is starting to piece things together," he said.

Standard Life sees most of the wasted money in shadow financing going to property developers.

"There are a lot of ghost cities. But you can find them in Florida. You can find them in Spain," said Milligan. "The off-balance sheet financing is manageable today. The question is whether it will be manageable tomorrow."

And the answer from Milligan at Standard Life is: "We don't know yet."